Railroad transportation companies have had a good year so far, with shares of Norfolk Southern (NSC), CSX (CSX) and Canada Pacific Railway (CP) all up more than 10% in 2013, while Union Pacific‘s (UNP) stock is up about 7%. And all this amid concerns about lack of demand for coal.
Coal volume fell 12.6% year-on-year last week, which according to Jefferies was the 17th double-digit year-on-year decline in the past 18 weeks; the previous week the drop was 16%.
But there are reasons to hope: Autos volume jumped 19.1% last week, and Jefferies notes that rail carloads, excluding coal, actually rose 3.5% (including coal the figure is a 3.5% decline). Total rail volumes were up 3.8% compared to 2012.
The coal worries have different meanings for different firms. Union Pacific, considered less vulnerable to coal’s weak demand, reported fourth-quarter earnings yesterday morning which beat analyst estimates, though revenue came in slightly below consensus forecasts. The immediate reaction to the news wasn’t great, with the stock losing 1.1% yesterday. It was back up today, closing up 0.7%, and both Raymond James, Susquehanna and Dahlman Rose this morning reiterated their Buy rating on the stock.
CSX reported earnings on Tuesday, and profit and revenue both beat estimates; the stock rose 6.4% this week. In the wake of the results RBC Capital Markets upgraded CSX to Outperform, while�analysts at Jefferies and Sterne Agee reiterated their Buy rating. Dahlman Rose, however, reiterated a Hold, pointing to weak coal traffic.
Norfolk Southern also reported Tuesday, notably showing coal revenues fell 23% from the prior-year period. Even with the decline, it too beat estimates though it wasn’t enough for some: Baird maintained its Neutral rating following earnings, largely due to coal:
We remain Neutral-rated, but view NSC�s risk/reward as attractive into early signs of a potential inflection in coal demand fundamentals.
With all that said, and even with this year’s gains, it does seem the railroad sector is still linked to demand for coal. With the outlook for the first quarter (and even the rest of the year) not great for coal, the industry may be hard-pressed, even with recovery in other areas, to see gains in the foreseeable future. As the Jefferies analysts write:
Coal is likely to continue to dominate the investment debate at the rails for the foreseeable future. Last year at this time, we downplayed market concerns regarding the impact of weaker U.S. utility coal; the rails hold price in that market despite weaker volumes and redeploy the assets in other parts of the network. Today, market fears center on export met coal; this is a bigger headwind because the rails (primarily East Coast) take volume, price, and utilization risk. UNP essentially has no export met exposure and thus is generally outside of this debate. We continue to support CSX on the view that export met won’t go down forever, while valuation creates an attractive long-term entry point. To be clear, we don’t think export demand has bottomed yet, which understandably will keep some price-sensitive investors on the sidelines.
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